MGX Resources Limited (MGX) Earnings Call Transcript & Summary

Thank you for joining today's teleconference for the release of Mount Gibson Iron FY 2024 Financial Results. Mount Gibson's Chief Executive Officer, Peter Kerr, will be leading the discussion and is joined by Chief Financial Officer, Gill Dobson; and External Relations Manager, John Phaceas. Mr. Kerr will provide a brief overview, after which there will be an opportunity to ask questions. Due to time constraints, only institutional participants will be invited to ask questions at that time. A recording of the call will also be available via the Mount Gibson website shortly after completion of today's teleconference. Thank you, and go ahead. Thanks, Peter.

Thanks, Lisa. Good morning all, and thank you for joining us to discuss Mount Gibson Iron's financial results for the '24 financial year. As usual, I'll give a brief overview before handing back to Lisa for any questions you may have. And also, as usual, any dollar references we make as to Australian dollars unless otherwise indicated. So the business delivered a solid operating and financial performance over FY '24, particularly in the first half, given the benefit of previous investments made at Koolan Island in overburden removal, plant improvements and the buildup of high-grade stockpiles, which were monetized during the period. The second half was more challenging as iron ore prices weakened and mining was completed in the western half of the pit, after which we commenced the planned transition to the eastern half and that will be the main source of ore over the mine's remaining 2- to 3-year life. Overall, sales were near the upper end of our guidance at 4.1 million wet metric tonnes, grading 65.3% iron generating full year sales revenue of just under $668 million free on board. Unit cash operating costs declined, but given inflationary cost pressures and the high proportion of fixed costs for the remote Koolan operation, we were 5% above our targeted range at $74 per tonne shipped FOB before royalties and capital projects. Notwithstanding this, the Koolan Island operation generated a solid cash flow of $284 million, which was 3x more than in FY '23. Together with the proceeds of our Mid-West divestment to Fenix Resources early in the financial year as well as interest and other income items, the company's cash and liquid investment reserves increased by $280 million to $442 million at period end, and that excludes the share and option holdings in Fenix, a stake of 8.6% worth over $20 million at 30 June and which we've since increased to just over 10% through the exercise of the $0.25 tranche of options received as part of the divestment. Including our Fenix interest, our total cash and investment reserves balance at 30 June equated to an effective cash and investment backing of $0.38 per share. The current share price below this level is not a reflection of the true value of the business at this point, given the additional cash flows anticipated from future production at Koolan Island, notwithstanding weaker iron ore price. Hence, the Board's decision to implement an on-market buyback of up to 5% of the company's issued shares, which is expected to commence in mid-September. Turning to earnings. Profit before tax and impairments doubled to $211.6 million from $105.9 million previously. However, given the weaker iron ore price towards the end of the year, this result was eroded by noncash accounting impairments totaling $159.1 million of the carrying values of the Koolan Island operation and a tax expense, which also reflected the accounting derecognition of deferred tax assets. While these impairment expenses are unfortunate, they're reflective of the recent weaker iron ore prices and outlook, but they are noncash adjustments, which effectively bring forward depreciation and amortization charges that we would otherwise incur in the next few years. As a result, net profit after tax for FY '24 was a modest $6.4 million. So turning to Koolan Island in a little more detail. Firstly, to mining performance. The waste-to-ore stripping ratio reduced in line with the mine plan to average 0.6:1 compared with 2.2 1 in the prior year. Total material movement in the year was 5.9 million tonnes, and that included 3.7 million tonnes of iron ore. And that compared with the prior year's total movement of 12.9 million tonnes, including 4 million tonnes of iron ore. Stripping ratio will increase in the year ahead as we reconfigured the primary haul ramp access, which is actually now substantially complete and moved the mining focus from west to east in the main pit. Removal of the -- now the front, eastern haul ramp and the underlying waste material has commenced, and that area will ultimately enable access to the deeper high-grade ore in the eastern floor of the pit. As noted in our recent quarterly report, we've also commenced the remedial ground support work that's required on the upper central footwall area to facilitate the safe recommencement of iron ore extraction below that area where we had a rock fall in August '23. This work is advancing well. Processing volumes increased by 12% over the year to 4 million tonnes compared with 3.6 million tonnes in FY '23, and it was weighted to the December '23 half year period in which we processed the remaining high-grade stockpile generated in that prior year. Since December, processing has been more closely aligned with ore production, which will remain the case going forward. The addition of a tertiary crushing circuit is complete with commissioning underway and this will reduce our unit crushing cost as contract crushing services will no longer be necessary. As noted, Koolan Island generated an operating cash flow of $284 million and a profit before tax and impairments of $181 million in FY '24, and that was up from $118 million in the prior year. Unit cash operating costs reduced to $74 per tonne sold FOB in the year before royalties and capital projects, and that compared with $77 in FY '23. After accounting for substantial negative provisional pricing adjustments in the June '24 quarter as iron ore prices declined, and we previously reported the detail of that. Koolan Island was still able to generate an attractive cash margin of $69 per tonne sold. In the year ahead, we'll be continuing to target cost reductions at Koolan, which are a function of both cost out as well as increased physical volumes given the high proportion of fixed costs at the remote operation. And lastly, on Koolan, I also note that last week, we announced the finalization of the business interruption claim relating to the August '22 processing plant fire for $27.3 million, which we expect to receive in the September quarter. These funds are in addition to the $10.4 million previously received for the property damage component of that claim. Regarding the Mid-West business. For completeness, we again note that the sale of the majority of our Mid-West assets to Fenix Resources was completed in July '23. That divestment delivered a pretax gain of $35.9 million as well as $1.2 million in subsequent dividends. You may have also seen that we've recently exercised one of the option tranches received as part of the sale consideration, as I mentioned earlier, and that has increased Mount Gibson's shareholding in Fenix to just over 10%. I'd now like to just briefly touch on iron ore market conditions and the outlook. Recent iron ore price movements have clearly been challenging. While prices in the first half of FY '24 were reasonably strong, they have retreated since that time and remained depressed due to ongoing global geopolitical tensions and, of course, uncertain Chinese economic conditions, particularly with the Chinese property and infrastructure sectors. The stronger first half meant that prices actually rose year-on-year on average terms with the Platts index price of 62% Fe fines averaging USD 119 per tonne CFR compared with USD 110 in FY '23. Of more relevance to Mount Gibson, however, the high-grade 65% Fe price averaged USD 131 per dry metric tonne CFR compared with $124 previously. Australian dollar weakness also provided an additional buffer, averaging $0.656 versus $0.673 in the prior year. Meanwhile, shipping freight rates from Koolan Island to Chinese ports have remained relatively stable between USD 13 and USD 15 per tonne shipped. As a result, Koolan Island fines consequently realized an average free on board, i.e., at Koolan Island, price of USD 109 per dry metric tonne FOB in FY '24, and that was up from USD 103 in the prior year. Prices for 62% FE fines are today sitting at around USD 95 per tonne and the high-grade 65% material, they're currently around USD 109 per tonne. That differential is obviously very important for us. While we welcome any improvements in Chinese steel and iron ore demand and obviously prefer prices to be higher, the quality of Koolan Island's fines products continues to provide an important buffer with the high-grade premium widening from a grade adjusted average of around 5% in FY '24 to around 10% currently. This brings us to the outlook for FY '25. As previously indicated, we're targeting sales of 2.7 million to 3 million tonnes in FY '25 and lower than our sales in FY '24, and that reflects the prior depletion of surplus ore stockpiles and the reduced shipment volumes as we shift the focus of mining to the eastern end of the main pit. Shipping rates are anticipated to increase as the year progresses and then further into FY '26 and into FY '27. We're targeting unit cash operating costs of [ AUD 95 to AUD 100 ] per tonne FOB in FY '25. And that is inclusive of capitalized mining costs relating to the setup of the eastern end of the pit. And it also reflects Koolan Island's high proportion of fixed costs being spread over the reduced sales volumes whilst we do that. However, as noted earlier, we're working hard to achieve volume increases and unit cost savings during the year as various initiatives take effect. While we retain our core focus on maximizing cash flow from Koolan Island, we've also accelerated our search for opportunistic resources investments. We've added new investments in a number of operating and development companies with the equity positions valued at $18.5 million at year-end. At the same time, we're actively evaluating material investment opportunities in Australia, primarily focused on bulks and those areas of iron ore, coking coal and bauxite and also on conventional base metals projects, in particular, copper, lead and zinc. Recent market volatility and, in particular, the lack of funding readily available for many mining projects in Australia and our healthy cash reserves puts Mount Gibson in an advantageous position for a patient mid-tier mining company seeking to act on the right opportunity whilst also generating cash flow from its existing operation. And finally, I want to highlight the Board's decision to commence an on-market share buyback of up to 5% of the company's issued shares, reflecting confidence in the company's outlook. This underlying value is not presently reflected in the company's share price, making a buyback an effective value accretive capital management initiative. The buyback will commence in mid-September '24 and be undertaken over a 12-month period unless it's completed or terminated earlier. So with that, I'll hand back to you, Lisa, for any questions that anyone may have.

Thank you very much, Peter. [Operator Instructions] We do have a question. Our first question is from Hayden [ Bairstow ] from Agronaut.

Just on the capital management strategy. I mean, the size of the buyback is a little more, I guess, the question, and obviously, you talked about doing M&A deals, but it appeared that some of the dividends we've had in the past in sort of dollar million basis, why that wasn't a bit bigger?

Look, this is the Board approved percentage Hayden. And potentially, it could go and be bigger in the future. But we're looking at a range of options, and this was just the start for trying to build some fair value recognition back into the share price. So that's big [indiscernible] at this point. The other aspect is obviously to try and preserve the cash flow opportunities, but if recognized on the Board level that there are a range of things we can do, and this is a way to start.

Okay. And just on the Fenix stake we obviously exercise those options, were that was all just as planned? Or were you sort of sitting with that equity stake?

The equity stake is from the divestment of the Mid-West assets. And those options, there's $0.25 tranche and a $0.30 tranche. We were looking to do that $0.25 tranche, and so it was part of our plan. And then the objective being that if Fenix is in a position where it is to pay dividends, then we'll pick up some of the dividends on the shares that we see given the dividends don't accrue to the options. So that's really the investment logic for it. And the company or the people at Fenix are doing a good job in looking at opportunities in the Mid-West. So we're trying to support that.

Do you think that strategy will be reviewed if you do go by base metals I said or something as you mentioned before, but in terms of holding on equities as well?

Look, it's a possibility, but this one interests us. So that's why we separately disclose it now really.

Our next question is from Glyn Lawcock at Barrenjoey.

Just on the buyback a little bit more to Hayden's question. I mean if you are looking to do M&A, I mean you're buying back stock, does that -- and then you may be issuing it again to do M&A? Or do you think whatever you're looking at, do you do all the cash, not with stock? Just want to understand buying it back and then maybe issuing it if we're going to do something.

So the view -- and it's a good question, Glyn. The view is pretty simple and that this share price doesn't fairly reflect the value we have left in Koolan and what we've got in the business. So buying it back hopefully sends the message and recognizes that and for those shareholders who remain that's accretive. In terms of M&A and at these types of share price levels it's difficult to be arguing that we should be issuing many shares. And so we'd be focusing on cash transactions. But if we could have some value better reflected in share price then at a higher level, and there's always the potential for equity issue as part of the transaction. But at the moment, the focus is on just getting that fair value reflected.

Do you have any indication from your major shareholder, whether they'll participate in the buyback?

No formal indication but I don't expect them to participate.

You don't. So even with shrinking liquidity, unfortunately, as well.

Yes. And so about 5% is part of that. So although the liquidity hopefully won't change too much.

Yes, sure. Just talking about your major shareholder, I mean, how are they -- what sort of feedback are they providing you with on the state of the China market? I mean you called out in your preamble a little bit of uncertainty across China. But I mean what color are they giving you? Is this just a seasonal weakness, structural weakness? I mean obviously, [indiscernible] Chairman last week scared a lot of people with his -- in his commentary. Just wondering what feedback you get directly from your major shareholder and customer?

Look, feedback so far has been probably not as negative as [indiscernible] comments, but it's been cautious, but with an expectation that the steel demand is still there, and therefore, the demand for seaborne iron ore will continue. So the pricing around where we have been, that $100 to $110 million has always been the area where they viewed equilibrium and a fair price. That view hasn't seemed to change at this point.

Okay. So it's more seasonal, not structural yet. Can I...

Yes, yes, but fair degree. [indiscernible].

Fair degree?

Yes.

And where does that then leave you, Peter? I mean, you talked about a cost you got last year at the mine gate or guess at your port of, I think you said $109. What are you actually receiving today versus that $109 a tonne 65 Index at the port?

So the price we receive for that 65% material, if you just break it down roughly as follows is, the 65 Index, which sits at [ $109 ] and the shipping freight -- sorry, I should add before that penalties are around $5 to $6 per tonne for 65% material, and that generally relates to minor deductions for silica and sizing aspects to take off, say, $5 to $6 for that. Shipping freight rate is currently around USD 14 a tonne. And you get -- that's our FOB price for 65% material and translate that into Aussie dollars. So we do see at reasonable Aussie dollar prices at Koolan Island and Mount Gibson sales are all on FOB terms. So everything we do is our customers are responsible for the shipping. We're focusing on FOB costs and revenues.

Okay. And then so how would that translate then through if prices do continue to weaken, where does that lead your thoughts on the buyback, right? If prices drop another $10 and your margin gets shrunk, does the buyback gets shelved?

Look, that's the consideration for the Board. I think it does at this point because what we have left at Koolan Island over the next 2 to 3 years, leaves us with this first year ahead, have higher costs because of what we're doing with the setup of the east end of the pit. And then in the following 1 year or 2 after that, then our ore volumes increase. So anything that has the effect of increasing volume helps us on a unit cost basis. So we should have a stronger run in fiscal '26 and '27 as far as our performance and cost cut. So that comes into the consideration of being, well, is a buyback still appropriate at that point in time. So at this point in time, that's where the Board had set it and is keen to pursue it.

Yes. At today's price it's fine?

Yes.

Thank you, Peter. We have no further questions.

Okay. Well, look, thanks for the questions [indiscernible]. And thank you to everyone for listening. If you do have any further queries, please reach out to us. Contact details are on the releases, and have a good day. Thank you.

Thank you, Peter.